Berkshire Hathaway 2011 Annual Report Download - page 88

Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re (Continued)
net increase in nominal IBNR reserves and a corresponding reduction in pre-tax earnings of approximately $174 million. We
believe it is reasonably possible for the tail of the expected loss emergence patterns and expected loss ratios to increase at these
rates.
Overall industry-wide loss experience data and informed judgment are used when internal loss data is of limited reliability,
such as in setting the estimates for mass tort, asbestos and hazardous waste (collectively, “mass tort”) claims. Gross unpaid
mass tort liabilities at December 31, 2011 and 2010 were approximately $1.6 billion and $1.7 billion, respectively. At
December 31, 2011 and 2010, mass tort liabilities, net of reinsurance, were approximately $1.2 billion and $1.3 billion,
respectively. Mass tort net claims paid were $58 million in 2011. In 2011, ultimate loss estimates for asbestos and
environmental claims were increased by $39 million. In addition to the previously described methodologies, we consider
“survival ratios” based on net claim payments in recent years versus net unpaid losses as a rough guide to reserve adequacy. The
survival ratio based on claim payments made over the last three years was approximately 16 years as of December 31, 2011.
The reinsurance industry’s survival ratio for asbestos and pollution reserves was approximately 9.5 years based on the three
years ending December 31, 2010. Estimating mass tort losses is very difficult due to the changing legal environment. Although
such reserves are believed to be adequate, significant reserve increases may be required in the future if new exposures or
claimants are identified, new claims are reported or new theories of liability emerge.
BHRG
BHRG’s unpaid losses and loss adjustment expenses as of December 31, 2011 are summarized as follows. Amounts are
in millions.
Property Casualty Total
Reported case reserves ........................................................... $2,274 $ 3,445 $ 5,719
IBNR reserves .................................................................. 2,406 4,576 6,982
Retroactive .................................................................... — 18,788 18,788
Gross reserves .................................................................. $4,680 $26,809 31,489
Deferred charges and ceded reserves ................................................ (5,076)
Net reserves .................................................................... $26,413
In general, the methodologies we use to establish loss reserves vary widely and encompass many of the common
methodologies employed in the actuarial field today. Certain traditional methodologies such as paid and incurred loss
development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques are
utilized as well as ground-up techniques where appropriate. Additional judgments must also be employed to consider changes in
contract conditions and terms as well as the incidence of litigation or legal and regulatory change.
As of December 31, 2011, our gross loss reserves related to retroactive reinsurance policies were predominately for
casualty or liability losses. Our retroactive policies include excess-of-loss contracts, in which losses (relating to loss events
occurring before a specified date on or before the contract date) above a contractual retention are indemnified or contracts that
indemnify all losses paid by the counterparty after the policy effective date. We paid retroactive reinsurance losses and loss
adjustment expenses of approximately $1.6 billion in 2011. The classification “reported case reserves” has no practical
analytical value with respect to retroactive policies since the amount is often derived from reports in bulk from ceding
companies, who may have inconsistent definitions of “case reserves.” We review and establish loss reserve estimates, including
estimates of IBNR reserves, in the aggregate by contract.
In establishing retroactive reinsurance reserves, we often analyze historical aggregate loss payment patterns and project
losses into the future under various scenarios. The claim-tail is expected to be very long for many policies and may last several
decades. We assign judgmental probability factors to these aggregate loss payment scenarios and an expectancy outcome is
determined. We monitor claim payment activity and review ceding company reports and other information concerning the
underlying losses. Since the claim-tail is expected to be very long for such contracts, we reassess expected ultimate losses as
significant events related to the underlying losses are reported or revealed during the monitoring and review process. During
2011, retroactive reserves developed downward by approximately $1.1 billion.
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